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I want to buy equity mutual funds. People told me that I should invest during NFO.

Posted by Prashant Shah on September 23, 2010

New Fund Offer (NFO) is one of the regulatory requirements for the mutual companies if they want to launch a new scheme. Units have to be issued at face value which is Rs.10 during NFO. Hence any rational investor feels it cheap to buy instead of paying something more than Rs.200 per unit for the reputed mutual fund scheme.

In direct equity investment when you buy the share of a company at Rs.10 you believe that it will Rs.20 soon at the same time it is not possible for the companies which are trading at let say Rs.2000 plus per share. That difference arises because of the market capitalization. Smaller prices companies normally belong to small cap segment which is high risk high return game.

This concept is fortunately not applicable to mutual funds because it is a portfolio of equity shares. As the scheme becomes older the NAV of the scheme gradually increases. Say for example Reliance Growth Fund was launched in October 1995 at face value of Rs.10. At present the same is available at Rs.500 plus. So as market increase every mutual fund scheme benefits but yes magnitude is different.

When investment is made in mutual funds, NAV/Price becomes irrelevant and hence focus more on returns generated by mutual fund scheme. So I think I have answered your first question. Now the second question is whether to invest in NFO or not? I say no because of several reasons. The first reason is, the scheme has not proved its performance as well as concept and another reason is you may find the similar kind of existing scheme available in the market. Hence think more in terms of creating a fine balanced portfolio instead of getting lured with rosy advertisement and presentations.


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